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Saturday, June 09, 2007

America's inequality conundrum

The New York Times Magazine has a long piece by Roger Lowenstein on what he calls The Inequality Conundrum. This excerpt (emphasis added) focuses on the policy choices facing government:

You can boil down most economic policy debates — starting with Hamilton versus Jefferson and moving to Bush versus the Democrats — to this tension: how can you promote equality without killing off the genie of American prosperity? The trade-off is clear at the extremes but fuzzier in the middle. A little redistribution, cleverly designed, doesn’t hurt. One example might have occurred during the late ’90s. The stock market was crowning multimillionaires, but the poor also did a little better. Among households with children, cash earnings of the poorest quintile doubled (though their earnings, at $13,000, remained meager and have tapered off more recently).

Most of the improvement at the bottom was because of people working more hours rather than for higher wages: a red-hot economy provided more jobs. The retooled federal welfare program, however, as well as the expansion of the earned-income tax credit (E.I.T.C.), gave people an added financial incentive to work.

Some redistribution is clearly good for the entire economy — providing public schooling, for instance, so that everyone gets an education. But public education aside, the United States has a pretty high tolerance for inequality. Americans care about “fairness” more than about “equalness.” We boo athletes suspected of taking steroids, but we admire billionaires.

...When it comes to raising the bottom in the short term, Washington basically has two choices: it can try to change market outcomes or it can redistribute after the market results are in. The first method is more intrusive. It includes limiting trade, regulating the workweek or restricting access to certain jobs, through mechanisms like licensing. Since the ’70s, the United States has moved away from such market interventions, but Congress seems to be acting on two of them. It just voted to raise the minimum wage, for the first time in 10 years, and it is seeking a compromise to revise the immigration laws.

And what about redistribution after the fact? The United States does less of it than Europe, and less of it than we used to. Even though the United States is richer than Belgium, a poor person in Belgium is better off than one here. On the other hand, the price for being Belgian is steep: Belgium’s median disposable income — what people have left to spend after they pay taxes and collect welfare-type payments — is only 72 percent as high as ours.

Even in the United States, the rich pay a disproportionate share of the federal income tax, which mildly reduces inequality. Other taxes, however, like Social Security, are regressive: the rich pay a lesser share. Thus, the upper tenth of households pay 70 percent of the income tax, but only 52 percent of all federal taxes. State sales taxes make the system even more regressive, because poorer people spend a higher share of their total income on them. Kevin Hassett, of the American Enterprise Institute, estimates that a family of four earning $50,000 pays exactly the same share of its income (30 percent) on taxes as one earning $150,000.

There is little agreement on how much redistribution is too much. But common sense tells you that a small increase in taxes when rates are relatively low, as they are now, isn’t going to curb people’s animal spirits. Higher taxes in and of themselves, however, won’t cure inequality. The point of taxing, as Becker is quick to point out, isn’t to confiscate: it’s to raise revenue for things that will benefit society, in this case helping those at the bottom. Though such thinking is a good argument for further expanding the E.I.T.C., which rewards people for working, in the long run you want to get folks moving up the skills ladder, so fewer people are in need of wealth redistribution. That this hasn’t happened is rather a conundrum. The incentives are certainly there. College grads make more than 40 percent more than high-school grads. Those with postgraduate degrees earn twice as much.

To Becker, this is a good thing; it offers an incentive for people to pursue education. The trouble is, it hasn’t worked. The Americans that Freeman once called overeducated are plainly undereducated today. Only about a third of the population graduates from college. Among the poor, there has been only a very slight increase in college-graduation rates.

To get more Americans to enroll in and complete college, the theory goes, you can either fix the schools (more teachers, longer school years, more student loans or fix the students (more nurturing of kids from disadvantaged homes). Both approaches would cost a lot. But if you’re worried about inequality, it’s hard to see any alternative. Hamburger flippers simply don’t command a high wage. We can pass laws to change that — a minimum price for cheeseburgers, maybe — or we can, finally, invest in teaching the flippers to do something else.

Comments

There doesn't seem to be enough American workers, in part, because households are in debt from cheap goods and low interest rates, since Americans maximized their living standards and have to work longer to at least maintain autonomous consumption, which adds to economic growth. See article/link below:

Record Low Unemployment in West Creates Tough Working Conditions for Business Owners Saturday August 25, 2007

HELENA, Mont. (AP) -- The owner of a fast food joint in Montana's booming oil patch found himself outsourcing the drive-thru window to a Texas telemarketing firm, not because it's cheaper but because he can't find workers.

Record low unemployment across parts of the West has created tough working conditions for business owners, who in places are being forced to boost wages or be creative to fill their jobs.

John Francis, who owns the McDonald's in Sidney, Mont., said he tried advertising in the local newspaper and even offered up to $10 an hour to compete with higher-paying oil field jobs. Yet the only calls were from other business owners upset they would have to raise wages, too. Of course, Francis' current employees also wanted a pay hike.

"I don't know what the answer is," Francis said. "There's just nobody around that wants to work."

Unemployment rates have been as low as 2 percent this year in places like Montana, and nearly as low in neighboring states. Economists cite such factors as an aging work force and booming tourism economies for the tight labor market.

For places like Montana, it has been a steady climb in the nearly two decades since the timber and mining industry recession. The state approached double-digit unemployment levels in the 1980s and began the slow crawl back in the early 1990s.

"This is actually the biggest economic story of our time, and we don't quite grasp it because it is 15 years in the making," said economist Larry Swanson, director of the O'Connor Center for the Rocky Mountain West at the University of Montana.

The U.S. Department of Labor reports the mountain West region -- covering eight states along the Rocky Mountains -- has the lowest overall unemployment rate in the nation. The region hit an all-time low of 3.4 percent in May.

The effects are everywhere. Logging equipment in Idaho sits idle as companies have a tough time finding workers. A shortage of lifeguards has forced Helena to shorten hours at children-only pools. A local paper in Jackson, Wyo., has page after page of help wanted ads.

In Jackson Hole, the Four Seasons Resort still had openings in late July. The problem has created longer hours and tougher working conditions for current employees.

For years, the resort has imported dozens of workers from Eastern Europe who often come as much for the summer recreation opportunity as the money. This year, however, that wasn't enough and so for the first time the resort also sent recruiters to a high school job fair, said spokeswoman Greer Terry. It only helped a little.

"It's been a struggle finding employees this summer," Terry said.

Economists say there are a number of reasons why parts of the West are feeling the labor pinch.

Established baby boomers, including retirees, have been moving into Montana for the mountain views and recreation, bringing with them money for new homes that fuel construction job growth, said Swanson.

Along the way, younger people have moved away searching for bigger paychecks as the state's wages still lag behind other areas and are slowly increasing overall. Now, the aging work force is unable to expand to meet the demands of the job market, Swanson said.

He said the problem is compounded by the fact that employers, accustomed to paying relatively low wages, have been slow to increase salaries. Montana wages have historically been among the lowest in the country, and still rank near the bottom. The silver lining for workers is that wages are now growing at the third-fastest rate among U.S. states.

Now, workers with more options in some places are unwilling to take $12-an-hour jobs.

The problem could get worse as more baby boomers retire, Swanson said. By 2030, Montana and Wyoming are predicted to have among the oldest populations in the U.S, with about 26 percent of residents 65 and older, Swanson said. That compares to 19.7 percent predicted nationally.

"We thought the labor force crunch wouldn't come until 2012, but it's already arrived in a lot of these fast-growth areas," Swanson said. As a result, "you'll find older workers working longer, people will sort of linger in the work force. The employers will make it worth their time to."

Swanson added the phenomenon of quasi-retirement with older workers cutting back on hours but still heading to the office will grow, while international workers will be drawn to the region. Younger workers who used to leave will find it worth their while to stay.

"The squeeze is on. You get into these 2 percent and less unemployment rates and you're moving into a seller's market with the seller being the worker," Swanson said.

Officials worry the razor thin labor market could bind economic growth, although there has been no indication of that yet.

"One of the reasons we are seeing the lower (unemployment) rates is we are starting to see more investment in our economy. It's like finding an undervalued stock," said Tyler Turner, Montana's economic development chief.

In Helena, the pool of applicants has been shrinking even for jobs on the police force. For professional jobs, such as department managers, the city is considering hiring slightly underqualified people that can be trained on the job.

"This is the tightest market I have ever seen," said Salty Payne, who has worked in the Helena City human resource office for 15 years.

Payne in part blames the area's building boom, which is drawing workers to construction trades that are offering higher salaries.

Montana state lawmaker Art Noonan lives in the mining town of Butte -- the epicenter of a big mining bust 20 years ago. Now, more people are moving in to build second homes and high paying jobs are coming back as copper prices go up.

"All of these things are sort of clicking at the same time," Noonan said. "The only economic development we used to get was the creation of more economic development offices."

In Utah -- where unemployment rates have been hovering around 2.5 percent -- amusement parks, trucking companies, telemarketing firms and others have been paying bonuses of hundreds of dollars or more to find workers.

"It boils down to the attractiveness of the (interior) West," said Mark Knold, chief economist at the Utah Department of Workforce Services. "It is a population magnet."

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